THE new governor in the State Bank of Pakistan is unlikely to produce major changes in monetary policy soon. And Dr Shamshad Akhtar has said the same. The present monetary policy will continue until the need for change arises, she says.

There are three obvious reasons why the former Asian Development Bank director general will not make abrupt changes to mark her arrival in the State Bank, which has been very active in recent years under Dr Ishrat Hussain, who remained in touch with the persons running the key sectors of the economy and responded to them.

Firstly, the new governor has a thorough academic background, which bars for abrupt changes in monetary policy. Secondly, she comes from a major international financial institution which does not opt for radical changes in official policies unless warranted and thirdly, the most important fact is that the economic policy (of which the monetary policy is a part) has been devised by Shaukat Aziz during his tenure as finance minister, a portfolio he continues to hold with a battery of advisors to help him.

And the prime minister has said after the earthquake and before the arrival of Dr Shamshad Akhtar that the economic policies will not change. This policy has been approved and owned up by President Musharraf. And that policy will now be helped further by the 700 million Saudi Riyals soft loan from the Saudi Development Fund, of which 500 million riyals are to be used for financing non-oil imports from Saudi Arabia.

What we have is a pattern of the economy, which is the market economy upheld by the World Bank and the Asian Development Bank. Dr Akhtar would follow that model based on liberalization, deregulation and privatization.

It seems that the international financial agencies are being given a chance to have their senior executives placed in the driving seat, turn by turn, as State Bank governors. First, in the early 1990s it was Dr Mohammad Yakoob from the IMF who became governor. Then it was Dr Ishrat Hussain from the World Bank for six years. Now, it is Dr Akhtar from the Asian Development Bank who will soon take over the State Bank and completes the trio.

Dr Akhtar knows of development economics well, not only because she did her M.A in development economics from Sussex University, but because of her experience in the ADB in charge of South East Asia. She knows the economic problems of Pakistan, the country with 155 million people of whom one-third are very poor, and whose poverty refuses to respond to conventional anti-poverty measures.

The soaring KSE-100 index may give an illusion of excessive prosperity as it races towards the 10,000 mark, but that has not reflected in an increase in taxes or provided larger resources to fight poverty. When it comes to monetary policy — of which the State Bank is in charge — the new governor has a great deal of respect for Dr Ishrat, who suggested her name to the president for the post. It has, of course, to be a dynamic policy which responds to new needs in a fast changing world. Note the price of gold, which is the highest after 1980.

Dr Akhtar has referred to inflation, which has been the concern of every top official, and mentioned two of the possible causes: supply side shocks and market structure. Both are contributors to inflation.

Dr Ishrat had greater faith initially in the efficacy of reducing money supply or tightening monetary controls to reduce inflation, but ultimately he realized that the supply side shocks, which were numerous, undermine the efficacy of a tight monetary policy.

He also realized the market, with its strong profiteering proclivities, undermined his effort to fight inflation. What we have is supposed to be a free market economy, but in reality it functions on the basis of price fixing cartels, which think in short- term and refuse to listen to reason.

Official appeals to the cartels, whether they be cement makers or sugar manufacturers, produce no positive response. So the officials give up in desperation or frustration. So, Dr Akhtar has a host of opponents from the vested interests to reckon with if she wants to fight inflation, despite the failure of her predecessors or other like-minded officials.

Before his departure as governor, Dr Ishrat Hussain took a positive step to correct the earlier wrongs. He announced a new ‘Basic Banking Account’ for small savers in the banks. The account can be opened with Rs1,000, which permits a maximum of two deposits and two withdrawals. There will be no minimum limit of deposit and no service charge.

All the banks are supposed to open the basic banking account. And that is a radical departure from the current demand of banks for Rs10,000-50,000 and some times Rs5,000 to open an account, as well as prescribing a penalty of Rs50 or more per month on amounts below the minimum amount.

He also said that the State Bank is finalizing a scheme for educational loans for higher education — up to Rs300,000 for Msc and PhD courses. The State Bank has also come up with guidance for the users of credit and debit cards as well as smart cards, who are some times ill- treated by the card issuing companies.

Evidently the pro-active role of the State Bank in a fast changing financial world with new instruments and new services will continue. The bank has to be wide awake and watch these trends in the banking system.

After the introduction of the basic banking system, the next step should be to raise the interest rates on deposits instead of giving a ridiculously low rate and then giving large profits to the shareholders to jack up the bank’s share prices. The banks should not thrive on the miseries of the small depositors who deserve a better deal. If it can’t be done through regulation, let that be done by strong persuasion.